China data lifts risk in Asia

FX markets have come to life in Asian trade after a surprise HSBC flash manufacturing PMI print.

Not only did the reading surprise to the upside, it came in at expansionary territory. The 50.1 reading (versus expectations of a 48.3 print) certainly goes a long way towards alleviating some of the China fears that have dogged the risk market over the past few months. We had seen risk currencies offered against the greenback on the back of the FOMC minutes, but this has swiftly changed with the China release.

Looking back at some of the highlights from the minutes, the Fed indicated that market expectations of the future course of monetary policy, both in regard to asset purchases and the path of federal funds rate, appeared well aligned with their own expectations. The Fed certainly seems to have mastered the art of keeping the market guessing.

While the minutes didn’t give any fresh clues on when we can expect tapering, and essentially re-emphasized what we’ve already heard from the Fed and various Fed members, it still resulted in a broadly firmer greenback. Investors concentrated on the fact that the minutes showed broad support for the tapering timeline already given by Fed chief Ben Bernanke. As a result, the only way forward is to continue closely watching US economic data for clues on how soon we can expect tapering to start.

AUD/USD has been one of the most volatile currency pairs in Asia today. The pair was sold off on US dollar strength, which saw it drop to a low of 0.8932 before bouncing back to the 0.90 region on the back of the China data. The 0.90 region will certainly be resistance in the short term until we get fresh catalysts for the pair.

EUR/USD dropped from above 1.34 to lows in the 1.333 region. The single currency will be back in focus later today with various PMI readings for the region due out. Any misses on the PMI front could see the single currency extend its losses in the near term.

USD/JPY has been the biggest beneficiary of the events from the Fed to China’s data. USD strength from the minutes saw the pair rally and test 98 in US trade, and the positive China data has seen the pair extend its gains to 98.34. The yen’s decline has occurred despite a fall in Japan’s foreign bond buying.

We expect to see further volatility on the USD side of the equation later today with unemployment claims and the US flash manufacturing PMI in focus. Unemployment claims are expected to rise to 329,000 after having dropped to the lowest level in six years last week. Any beats on these data prints would only reinforce tapering fears and support the USD.

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